Contributing to 401K while resident in canada

rsargant · Post by **rsargant** » Wed Aug 10, 2011 10:30 am

I am relocating to Canada for personal reasons and my U.S based company has agreed to keep me on under a newly created Canadian payroll. I am unable to rollover my 401k to a Roth before leaving because I'm not being "terminated" by my company so the funds remain locked up with the plan provider.

The plan provider says there is no issue with my remaining active in the plan while not U.S resident and that I can still contribute so long as its done in U.S dollars.

My question is, can I deduct 401K contributions made in this fashion against my Canadian income taxes? I've seen a couple posts on here that hint at this being possible for commuters but I'm not sure if I would qualify.

nelsona · Post by **nelsona** » Wed Aug 10, 2011 11:46 am

The new treaty allows US transferees to continue making tax-deductible (in canada) contributions to their US employer-sponsored retirement plans for upto FIVE years only.

The contribution MUST come thru payroll from the employer. You are not allowed to self-fund the 401(k) contribution however.

So, at a minimum your Cdn branch has to set up the 401(k) withholding.

See:
http://www.cra-arc.gc.ca/E/pbg/tf/rc267/rc267-10e.pdf
for the 2010 tax year. This form will be similar from year to year.

Note: I believe the restriction that you cannot be contributing to an RRSP during this period refers only to an employer-sponsored RRSP and other comapny pensions. You may still be able to 'top up' a personal RRSP, but be aware that your RRSP contribution limit will be severly reduced by at least the ammount of the 401(k) contribution, plus employer contributions, and maybe more. see the PA calculation on the form.

nelsona · Post by **nelsona** » Wed Aug 10, 2011 11:58 am

The pertinent treaty provisions are Article XVIII(8) and XVIII(15).

rsargant · Post by **rsargant** » Wed Aug 10, 2011 12:21 pm

Thanks again nelsona!

rsargant · Post by **rsargant** » Wed Aug 10, 2011 12:36 pm

Any opinion on whether it would be preferable to do this over just leaving the 401k alone and self-funding an RRSP?

While its nice to be able to do this, I think I might be better off funding a self directed RRSP account from earnings. Then there are no additional payroll complications and more investment choices.

Is there any real tax benefit to me in funding the 401K after leaving? How would that impact my IRS reporting. I was hoping to only have to file a simple 1040-NR stating rental income.

nelsona · Post by **nelsona** » Wed Aug 10, 2011 1:41 pm

The idea of maintaining 401(K) contributions is, as I said, for those temporarily in canada.

There is no tax advantage if you are going to stay in canada. In fact the bigger your 401(K) becomes, the more likely that you will not get full credit on your Cdn return for the US tax you will pay when you pull it out.

I'm assuming you aren't a US citizen, so, only US-source income would be reported on a 1040-NR (after this year).

rsargant · Post by **rsargant** » Wed Aug 10, 2011 3:33 pm

Thank you. This is not a temporary move so I don't think I'll use this option.

I'm still asking for a fire/rehire scenario to get at the funds because I would love to get into a Roth now before leaving. Otherwise, looks like I'll just leave it as is. It is sheltered for gains year over year in Canada is it not?

nelsona · Post by **nelsona** » Wed Aug 10, 2011 3:40 pm

US retirement accounts are automatically sheltered until you take a distribution, without any special forms, at which time they will be flat taxed in US, and added to your income in Canada, with credit given for US tax (not penalty).

rsargant · Post by **rsargant** » Wed Aug 10, 2011 7:18 pm

Thank you. Sounds like a tolerable situation but not as good as getting into a Roth.

I'm pretty happy about moving back to canada and being able to keep my job so I'm not going to worry about it too much. I might get another chance to go Roth later in my career.

Thanks again for the info.